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IPOs are still hot; you don’t need me to rehash all that. However, there’s a particular part of the market that’s getting a lot of love: pet products companies.
In early August, I talked about just how strong the pet products market is. This came as Blue Buffalo Pet Products (NASDAQ: BUFF) hit the public markets. The stock is still up 30% from its IPO pricing in July.
A couple of weeks ago we got the news that another pet products company is planning to capitalize on the hot IPO market: Petco, which is aiming for a $4 billion market value. The company was taken private close to 10 years ago for $1.7 billion by TPG Capital and Leonard Green.
The nice thing about some of the pet IPOs hitting the market is that they are pure plays. That means you can’t find another investment quite like them. Blue Buffalo is a prime example, whereas all the other pet foods companies are embedded in large food conglomerates.
$4.2 Billion in Sales
Petco, which hasn’t set an IPO date yet, will fall into this pure-play category. The pet store operator runs more than 1,400 superstores across the U.S. and Mexico. The news that the Petco IPO will hit the public markets after its top competitor, PetSmart, was taken private for $8.7 billion in the largest buyout of 2014. Petco is doing roughly $4.2 billion in sales a year, more than double the amount it was generating in 2005. For comparison, at the time it went private, PetSmart had roughly $7 billion in annual revenue.
Now, Petco does appear to be less profitable than PetSmart. But that likely means there are cost cuts to be made once the company is under the microscope of the public markets. PetSmart’s net margin was close to 7% in 2014, and Petco’s is roughly 2%. So there are lots of opportunities there.
But Petco is actually doing better than PetSmart in terms of sale-store sales, which is the growth of sales at stores that are opened longer than a year. Petco’s same-store sales have risen for 21 straight quarters at an average rate of 3.5%. For the last quarter that PetSmart was a public company, in 2014, its same-store sales were down 2.4%.
Healthy pet food is a strong market to be in right now. Really, all health-related stocks are in a bull market. But more broadly than just pet food, Petco is looking to take advantage of the growing market for pet care, pet services and pet products.
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And it’s an impressive market. Petco thinks that American spending on pets will grow by nearly 50% from 2010 to 2019. Today, Americans are spending around $75 billion on their pets; Petco believes that number will hit $92 billion by 2019. Part of this is because millennials are spending more on their pets than baby boomers.
The other, perhaps underrated aspect of Petco is that it’s more than a pet store. Retail is facing pressure from e-commerce, but Petco is getting out in front of this trend. In 2014, it bought Foster and Smith, which is an e-commerce business that sells its own branded pet products
Despite the increasing humanization of pets and rising demand for pet-related products, not all pet IPOs are created equal. There’s the retailer of refrigerated pet food, FreshPet (NASDAQ: FRPT), which is down 17% from its IPO price last year. Stick to those capitalizing on growing trends in the pet market and not just riding fads.
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